Game Analysis of Internal Control and Risk Management

Yanhong Pang, Qing Li

Abstract

Based on examining links and differences between internal control and risk management from their definition,this paper mainly analyzes their relation with game theory. A complete information static game model isestablished and payoff functions for managers and investors are designed. The result shows that the decrease ofbusiness risk cannot be realized by severe penalties, instead, the frequency of internal control in risk monitoringmust be taken into consideration, and otherwise it will stimulate enterprise risk monitoring paradox. It is aneffective way for enterprises to reduce risk by lowering the cost of internal control in risk monitoring andimproving the ability of risk prevention.

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